Columnist

The Coronavirus Crisis Will Change Consumer Behaviour

David Kauders FRSA, a founder member of Kauders Portfolio Management AG, explains three new economic concepts and their implications for post-pandemic business.

Before coronavirus arrived, the text of my book The Financial System Limit was ready to go into production. Like with so many other things, the pandemic changed plans and the book will now appear as an eBook with its last part devoted to longer-term economic implications of the Covid-19 crisis.

The book introduces three newly-defined economic concepts:

1. Debt cannot expand to infinity, shown by both numerical and logical arguments.
2. The world spends around one-fifth of its economic output on interest cost, a figure which nobody seems aware of.
3. The economic and business cycle is now driven primarily by the actions of central banks and government finance departments.

Academia does not recognise these three radical thoughts, yet they explain how modern economies work. There is a financial crisis and the authorities stimulate our way out of it. This stimulus adds to business and household debt service costs, providing an immediate fix but generating lethargic economic conditions later. This reinforces the limit to growth of debt.

Puerto Rico provided evidence of the limits to policy: its default occurred when 38% of economic output was being spent on debt interest costs. As a whole, the world is over half-way to this level. The financial system limit caused by the existing debt burden forms a natural brake on all economic policies.

There is a false emphasis on government debt and its superficially attractive low cost. British households and businesses borrow three times as much as the government, at much higher rates. The pandemic has focused minds on the risks of debt. Suddenly, saving more or paying down debt seems attractive. Businesses that rely on consumer finance to generate trade seem vulnerable to a prolonged debt work-off.

David Kauders, author of The Financial System Limit

War, revolution, economic collapse and plague are closely related. The historical evidence is that they all change behaviour.

People have to decide what they value. Before the pandemic, the world was on a debt treadmill, bringing high stress levels to those in work. Do we really value such lifestyles? Surveys showed that a significant number were dissatisfied with their jobs. Changing lifestyles will be part of the coming behavioural change.

In developed societies such as the United Kingdom, people will probably value community more and consumerism less. Households will no longer go on acquiring debt to spend on lavish lifestyles.

The pandemic will be severely deflationary. Isolated examples of price rises will occur transiently, notably in the food chain and transport, but overall the loss of economic output combined with loss of financial resources in capital markets will result in deflation. Just how this will appear is one of the unknowns. The deflation experienced in the Great Depression of the early 1930s was caused by a collapse in confidence following the Wall Street Crash of 1929. This deflation may be driven either by changed behaviour or lack of financial resources, or both. Possibly more.

Less trade, higher prices, but much lower demand will lead to prolonged economic lethargy.

Pricing power ‒ the ability of businesses to set price levels of their own choosing ‒ has now disappeared and this loss affects most industries. Price competition leads consumers to demand the cheapest then complain, often on the internet, if the service is less than perfect.

Even worse, though, is the rise in overheads. Few businesses can nowadays escape the effects of regulation, stricter liability and costly legal requirements. Overheads have risen as a result of public demand for rules about business conduct, control by government or its agencies, excessive record keeping requirements and hidden banking costs.

Tax rises are inevitable, but they also impact on economic activity. Taking more in income or expenditure taxes from the middle classes when the economic background is deflationary will cause households and businesses to reduce their discretionary spending. However, tax rises to fund governments may do little more than replace lost revenues from reduced economic activity. Past tax rises have sometimes been counterproductive, for example the Lawson and Brown raids on pension funds that started UK defined benefit pensions on the road to underfunding.

The days when governments could pull a policy lever marked “expansion” are over. Businesses need to plan for a shift away from the consumer society.

The Financial System Limit by David Kauders will be published by Sparkling Books as an eBook on 27th July, priced £4.99. It is now available for pre-order on Amazon or Kobo. For more information, or links to additional retails worldwide, visit Sparkling Books.

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